Deals, Dreams, and Doubts

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By Peter Zysk

In 2016, China surpassed all other countries in cross-border M&A and Chinese outbound investment hit an all-time high.

During the past few years, slower economic growth and the shift in China’s economy towards consumption has increased Chinese firms’ appetite to expand into new markets and industries. Yet, this unprecedented level of investment has not been without its challenges, with nearly one in 10 attempted acquisitions by Chinese companies failing.

Research among 1,600 top business decision makers in China and opinion elites in three of the top markets for Chinese outbound investment – the United States, the United Kingdom and Germany – revealed the reasons driving this recent surge in Chinese outbound investment, and the critical factors shaping decisions made in other countries to either approve or reject acquisitions.

Outbound M&A a Priority for Chinese Firms but Western Views of Chinese Investment are Divided

Overall, the survey finds that outbound M&A remains a priority. Facing a cooling domestic economy, Chinese business leaders are looking to acquire growth, unlocking new markets and revenue streams.

While Chinese firms are eyeing acquisitions all over the world, it is Asia which presents the top acquisition target for Chinese business leaders, perhaps a response to the government’s Belt and Road Initiative. The United States comes in second overall and also tops the list of developed markets, with management of two out of three Chinese firms considering acquisitions in the United States.

However, Western opinion elites have divided perceptions of Chinese firms, with the 53% that hold favorable views of Chinese companies only narrowly edging out the 47% that hold unfavorable views of Chinese companies. Chinese businesses face distrust toward their motives, while perceived shortcomings in governance and social responsibility exacerbate skepticism among American, British and German opinion elites.

Echoing the split in perceptions of Chinese companies, Western opinion elites are also closely divided in their openness to Chinese acquisitions of companies in their country – 56% are comfortable with these deals, 44% are uncomfortable. Overall, there is more comfort with Chinese acquisitions of local companies than might be otherwise assumed.

Levels of comfort vary depending on the type of company being bought. Western opinion elites hold the greatest comfort with acquisitions of hotels and hospitality companies (71% comfortable) and entertainment companies (70%).

Contrary to strongly voiced concerns by some leaders that Chinese acquisitions are primarily driven by a desire to seize valuable technology, almost two-thirds of Western opinion elites are generally comfortable with Chinese deals in the technology (61%) and manufacturing (60%) sectors. But, it is important to keep in mind that even in sectors that indicate the greatest comfort with Chinese acquisitions, a sizable minority, sometimes up to 40%, of Western opinion elites harbor concerns.

The highest levels of discomfort are in banking, energy, and healthcare and life sciences, where just over 50% of Western opinion elites are uncomfortable with Chinese acquisitions in these areas. Recent last-minute setbacks in high-profile Chinese outbound M&A deals acutely demonstrate this unease. Such 11th-hour about-faces serve as a reminder that Chinese outbound M&A and Western acceptance both remain on a journey of discovery.

More Information Leads to Substantially More Favorable Views of Chinese Investment

When it comes to successfully navigating the cross-border M&A environment, and in particular, cross-border acquisitions by Chinese companies looking to expand to the West, communication and engagement matter. Research indicates a direct link between information flow and perceptions of Chinese businesses. Among Western opinion elites who have heard “a lot” about Chinese businesses, 84% hold favorable views while only 15% hold unfavorable opinions. Meanwhile, Western opinion elites who have heard “a little” or “none” are the most critical, 31% have favorable opinions and 69% are unfavorable toward Chinese businesses. Greater information flow has a positive impact on perceptions of all company types, including SOEs.

Growing Challenges to Chinese Outbound Investment

The challenges in getting Chinese outbound investment across the line are increasingly complex, multi-dimensional and involve multiple jurisdictions.

Rising tension in the US-China relationship and uncertainty presented by the new Trump Administration mean Chinese firms targeting acquisitions in the US need to be mindful in their approach, even despite the more positive findings. Meanwhile at home, Chinese companies going global are facing the challenge of new capital controls.

It is therefore important companies looking to make overseas acquisitions double down on their efforts to build a clear understanding of who they are and deliver a sound rationale for the deal.

Communication and Engagement are Critical to Deal Success

The bottom line is that deeper understanding encourages trust, and trust is critical to deal completion. Right now, heightened interest in acquiring higher-value assets in the West is being met with mixed views and a fair amount of distrust. Given that global expansion through M&A is expected to remain a priority for Chinese business leaders, a Chinese firm seeking to acquire significant assets abroad should begin the process of establishing a profile in that market at the earliest possible moment – ideally well before announcing a bid for that asset. If political tensions continue to increase, navigating the deal environment with transparency will be even more critical. Communications and engagement help bridge this divide, as deeper understanding of Chinese firms leads to more support and acceptance.

About the Research

Brunswick Group’s recently issued report, Deals, Dreams and Doubts, surveyed 1,600 top decision makers in China and three of the top markets for Chinese outbound investment – the United States, the United Kingdom and Germany. Chinese business leaders are executives and senior managers at businesses in China (private and state-owned) that have already or are planning on expanding internationally. Opinion elites are highly educated, high income, news attentive, and civically active residents in either the United States, United Kingdom or Germany.

All survey research was conducted online. The first wave of research was conducted between April 28 and May 6, 2016. This initial wave included research among Chinese business leaders and US, UK, and German opinion elites. A second wave of research among Chinese business leaders was conducted after the Brexit decision between August 2 and August 8, 2016.

Brunswick’s full Deals, Dreams & Doubts report is available for download here.

Peter Zysk is an associate at Brunswick Insight, the opinion research division of Brunswick Group, a global critical issues and corporate relations firm with offices in 23 cities in 14 countries around the world.